A lot of people have gotten the wrong idea about tax refunds. It’s not your fault. I blame the media. Why not?! We blame the media for everything else. You do see it on television and in the papers quite a bit. “We’ll get you more money back!” “Make sure you get the most out of your refund.” More money, more money, more money. This is a problem!
It’s a problem because people come to expect a refund no matter what. It’s a problem because people aren’t taught to understand what a refund really is and how it really works. It’s a problem because when you expect to get a refund, you don’t bother to think about tax consequences and by the time I get your tax return, it’s too late! I can’t help you get a refund that doesn’t exist.
So I would like to try to correct this problem right now and reprogram your thinking on what a tax refund really is because one thing it most certainly not is “free money.”
It’s a REFUND! Picture it like this. You are at the grocery store. The clerk rings up $80 worth of groceries. You give them a $100 bill. They REFUND you $20. Taxes work the same way my friends!
Your employer pays you money. They are required to estimate how much tax you owe to the US Treasury based on your earnings. They withhold this estimated amount from your paycheck and pay it to the government. You file your taxes at the end of the year and if you paid too much, you are given a REFUND.
That’s right! You are being given back your own money! Money that you overpaid! Money that the government has sat on all year without paying you a dime in interest.
Okay, some of you are saying, “I already knew this. What are you getting at?” Fair enough. Here’s the lowdown -
YOUR TAX SITUATION CHANGES YEARLY!!!!!! That’s right! You might become accustomed to getting that $2000 refund every year. Then you sell your house and start renting. No more itemized deductions. Your refund drops. Your kid moves out of the house. No more dependent. Your refund drops. You get married and your combined income puts you into a higher tax bracket. Your refund drops. You finally get to retire after decades of hard work, but you don’t claim the same withholding on your pension that you did on your wages. Your refund drops. Are you starting to see a pattern?
I can hear your thoughts now. “Why do I need a tax preparer if there is only a certain amount of money I am supposed to get based on my income?” Here’s what we do:
We are educated on all of the different deductions available to you and we make sure we maximize your refund by seeing that you get everything you qualify for and we can help you plan and prepare for taxes when you tell us about your life and when your life situations change. We also help you plan and prepare for when the tax laws change.
What we don’t do is pull numbers out of thin air to get a you a magic refund that is free money from the government. Sorry guys.
Here is my advice to you. When you fill out your W-4 to claim how much withholding you want, think of it as one of two possibilities: 1. Claiming extra withholding that goes into a forced savings account (that does not pay interest) until you file your taxes at the end of the year OR 2. Trying to break even at the end of the year by getting as much of your money as possible paid to you in your paychecks all year long. Those are really your two options and either way is fine as long as you are aware of what you are doing with your money.